THE EFFECT OF CREDIT MANAGEMENT ON THE PERFORMANCE OF COMMERCIAL BANKS IN NIGERIA: A STUDY OF SELECTED BANKS IN MAKURI. CHAPTER ONE 1.1 Background to the studyThe Nigerian banking industry is one sectors of the Nigerian economy, whose services are ever needed by individuals and corporate organizations. One of the key players in this industry is the commercial banks. The popularity of commercial banks is not because they are the only legally or commercially recognized intermediary in the system but because of their branch network, large customer base and the ease with which people transact business with them.(Afolabi , 1991)The intermediary role of the commercial banks culminates in the extension of credit facilities such as loans/advances and investments through which they make funds available for individuals and corporate organizations. With this single function commercial banks help increase the level of economic activities in the society.The contribution of credit facilities by the banking sector towards achieving economic growth and development in Nigeria in general and Makurdi in particular cannot be overemphasized. Credit facility plays a crucial role to the survival of any business organization. The growth and development of every nation starts when the domestic needs are satisfied. Such needs include food security, shelter, and education and reduced unemployment rate. The banks through their services contribute immensely toward achieving these needs. The success or failure of a bank by and large depends greatly on its ability to grant credit facilities and make substantial profits from them.For most people therefore, commercial banks lending represent the heart of the industry. Loans dominate banks asset holding and generate the largest share of their operating income. Loan department/ officers are among the most visible, while loan policies typically determine how fast a community develops and what types of business spring up. The greatest challenge to the banks today is granting profitable loans at reasonable risks in the face of intense competition.(Olalusi, 1999).It is a known fact that not all credit facilities provided by banks are collected back. Many banks in Nigeria have been liquidated as a result of bad debts. The current state of our economy is a pointer to the fact that banks need to improve on their services as it relates to bridging the gap between the surplus and deficit units of the economy. Thus, a good management scheme will help to reduce the amounts which may be lost as bad debts and also in the collection process and period. (Nnanna , 2001) It is obvious that the banks face more challenges now than ever in the light of the global economic meltdown. “The credit crunch is impacting negatively on the capital raising activities of commercial banks. What is happening now is that credit has become more expensive than it used to be “ (Ebong, 2008.) Ogunjobi, believes that the liquidity squeeze in Nigeria is peculiar in the sense that the problem is not just of inadequate liquidity, but people are becoming more conscious of what is going on and are trying to conserve what they have that is why inter- bank lending is literally drying up.”This industry occupies a key position in the nation economic development and growth and as such, must not be allowed to collapse as that will have enormous catastrophic consequences on the economy of our nation (Soludo, 2005) The industry has a positive or negative impact on the growth, employment, risk, size and survival of the nation economy depending on the management and performance of the sub-sector, of the economy. “perhaps, it will be wiser than only persons with reputations and integrity and those who are knowledgeable and trained should be deemed fit and proper to carry on banking business in order to infuse the eroded depositors confidence and restore sanity in the industry’’ (Bexley, 1978).In the past, the bank owner were euphoric over their success, delighted with the profits but are surprised when the huge profits are compared with the bad and doubtful debts. At this juncture, it is a glaring indication that most banks were only declaring mere paper profits and it became very obvious that the banks performance were below expectations.Hence, nowadays no sooner that banks declare huge profits than they resort to the capital market to source for funds. In order to salvage the industry from frequent distress the industry has witnessed radical and phenomenal changes since 1986 following the introduction of the structural adjustment programme (SAP). Such changes include, banking regulations and supervision, the prudential guidelines issued by the central bank of Nigeria (CBN) in 1990, the failed banks decree of 1994, and the recent recapitalization of banks in 2005. This chapter will focus on how proper credit management by commercial banks contributes to their performance and economic development and growth.We shall also consider the various management strategies adopted by the banks in the management of funds to enhance profitability.1.2 Statement of the problemFinancial institutions particularly the banking sector plays a vital role in the economy of any nation. To achieve the economic objectives of any nation there must therefore be empowerment of the citizens and corporate organizations in the country by enhancing their access to factors of production especially credit facilities. This is the catalyst of stimulating sustainable economic growth and development. With access to credit the capacity of small scale industries and corporate organizations to operate optimally would be enhanced hereby providing the teeming population with employment opportunities, enhancing household incomes and creating wealth (soludo, 2004).The role of credit extension by the commercial banks has been impaired to some extent due to some fundamental problems in Nigeria at large and Makurdi in particular. The sacking and replacement of some banks executives by erstwhile CBN Governor, Sanusi Lamido Sanusi is a pointer to the fact that all is not well with commercial banks credit policy management.A review of the financial statement of commercial banks over the years shows that the huge amounts of money that are always written off as bad debts each year has been on the increase. Maybe, it is because commercial banks extend credits to the wrong people or that they don’t do enough in terms of collection efforts (Central bank of Nigeria (Sanusi Lamido Sanusi 2010) report presented to the CBN board. In this regards, perhaps it is timely to observe here that the fact that there is an increase in the number of commercial banks branches in Makurdi, yet most small scale and even big time business and organizations are having difficult times in accessing credit facilities.It is against this background and others that the researcher is interested in investigating the effect of credit management on the performance of commercial banks in Nigeria generally and selected banks in Makurdi specifically.1.3 Objectives of the studyThe main objective of the study is to ascertain the extent to which credit management has contributed to the growth of commercial banks in Makurdi. specific objectives include;1. To find out how the credit officers apply the canons of lending in the consideration of the credit worthiness of customers.2. To find out the extent to which credit facilities by commercial banks have contributed to the social economy development of Makurdi. 3. To identity the various measures adopted by commercial banks in the recovery of bad debts.4. To determine the overall effect of bad debts and doubtful debts on the performance of commercial banks.1.4 Research Questions For the purpose of this study the following research questions were developed.1. To what extent has credit officers applied the cannons of lending in the consideration of the credit worthiness of customers?2. To what extent has credit extension by commercial banks contributed to the socio-economic development of Makurdi?3. What are the various measures adopted by commercial banks in the recovery of bad debts?4. To what extent has credit management affected the performance of commercial banks in Nigeria?1.5 Research HypothesisHO1: Credit officers have not been applying the canons of lending in the consideration of the credit worthiness of customersHO2: Credits extension by commercial banks has not contributed to the socioeconomic development of Makurdi.HO3: Commercial banks have not adopted any measures for the recovery of bad debts.HO4: Credit management has not significantly affected the performance of commercial banks in Nigeria.1.6 Significance of the studyThis research work is of paramount importance to various categories of users. these users inter-alia include:The Government: It is of significance to the government as it will enable government to design credit policy procedures and guidelines that will enhance commercial banks growth and will also put measures in place to ensure proper monitoring and strict compliance with laid down rules and procedures.The Bank Management: it is also of significance to the banks as it will enable them appreciates the critical role performance and the various measures to adopt to sustain optimal performance and growth.The general public: It will help the public to know the role credit management plays in the performance of commercial banks. It will also enable them to know whether banks have in place good credit policies that enhance their performance.The competitors: It will also help competing firms to design measures which shall help them to survive in such a highly competitive environment and market.The students and researchers: It will also be of tremendous help to students and other researchers who may wish to embark on research in the same area as it will serve as a guide and source of further reference.1.7 Scope/ limitations of the studyThe study is meant to examine the effect of credit management on the performance of commercial banks in Nigeria. This will cover some selected banks in Makurdi namely; Uba Plc, Access Bank Plc, and First Bank Plc.There are many commercial banks in Makurdi which the researcher may not be able to study all. In view of this, the study has been delimited to the effect of credit management on the performance of selected commercial banks in Makurdi (UBA PLC, Access Bank PLC and First Bank PLC).1.8 Definition of termsFor purpose of this study certain words and concepts are used which may appear obscure to a reader not well versed in the field of finance. It is therefore pertinent to define such words or terms as used in this study to make them easily understandable to any interested party .Such terminologies and words are there defined below as used in the study.Bank: A commercial institution that takes deposits and extends loans. Banks are concerned mainly with making and receiving payments on behalf of their customers, accepting deposits, and making short term loans to private individuals, companies and other organizations. However, they also provide money transmission services and in recent years have diversified into many areas of financial services.Bankers References: A report on the credit worthiness of an individual supplied by a bank to a third party. Reference and status enquiry are often supplied by credit reference agencies who keeps list of defaulters.Bank Loan: A specified sum of money lent by a bank to a customer, usually for a specified period, at a specified rate of interest. In most cases banks require some form of security for loans.Bankruptcy: The state of an individual who is unable to pay his or her debts.Bad debt: An amount owed by a debtor that is unlikely to be paid.Bad debt recovered: Debts originally classed as bad debts and written off but subsequently recovered either in full or part.Credit: The reputation and financial standing of a person or organization. The sum of money that a bank allows a customer before requiring payment.Credit control: Any system used by a bank to ensure that its outstanding debts are paid within a reasonable period. It involves establishing a credit policy.Credit Rating: An assessment of the credit worthiness of an individual, i.e the extent to which they can safety be granted credit.Credit Risk: This risk taken when a loan is made that the borrower will the default or delay repayment of the principal or payment of interest.Debtors: Those who owe money to an organization.Debtors Collection Period: The period on average that a business entity takesto collect the money owned to it by debtors.Debt Restructuring: The adjustment of a debt, either as a result of legal action or by agreement between the interested parties to give the debtor a more feasible arrangement with the creditors for meeting the financial obligation.Management: This is that managerial activity which is concerned with the planning and controlling of the organizations finances, to make profit for its owners.Performance: The process of developing standards geared towards attaining certain predetermined goals..